The Recent Spike in Illicit Tobacco Trade in South Africa Dissertation submission to the Department of Economics of the University of Cape Town in partial fulfilment of the requirements for the Masters Specialising in Economic Development programme Student: Zeenat Ebrahim Student Number: EBRZEE005 Supervisor: Professor Corné van Walbeek Date: 7 February 2019 I gratefully acknowledge the funding received by the African Capacity Building Foundation, which is in turn is funded by the Bill & Melinda Gates Foundation. University of Cape Town
77
Embed
The Recent Spike in Illicit Tobacco Trade in South Africa
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
The Recent Spike in Illicit Tobacco Trade in South Africa
Dissertation submission to the Department of Economics of the University of Cape Town in
partial fulfilment of the requirements for the Masters Specialising in Economic Development
programme
Student: Zeenat Ebrahim
Student Number: EBRZEE005
Supervisor: Professor Corné van Walbeek
Date: 7 February 2019
I gratefully acknowledge the funding received by the African Capacity
Building Foundation, which is in turn is funded by the Bill & Melinda Gates Foundation.
Univers
ity of
Cap
e Tow
n
The copyright of this thesis vests in the author. No quotation from it or information derived from it is to be published without full acknowledgement of the source. The thesis is to be used for private study or non-commercial research purposes only.
Published by the University of Cape Town (UCT) in terms of the non-exclusive license granted to UCT by the author.
Since 2015, the South African National Treasury has experienced declines in tax-paid cigarette
revenues. The declines have been attributed to upward spikes in the illicit tobacco trade. This
dissertation explores the upward spike in the illicit tobacco trade, in order to assess whether
or not a relationship exists between tobacco companies’ actions and the spike in illicit activity.
The study analyses information gathered from semi-structured key informant interviews in
order to derive expert insights into the spike. The results indicate that the tobacco industry
as a whole is using a variety of tactics to protect their interests. This thesis suggests that the
recent increase in the illicit tobacco trade is the result of an increase in under-declared
cigarette production by the tobacco industry, which exploits a weak enforcement of anti-
tobacco laws.
2
1 Introduction
A rising illicit tobacco trade undermines tobacco control policies, resulting in significant
negative consequences for public health and tax revenue (World Health Organization, 2013).
The World Health Organisation’s (WHO) concerns about these negative consequences led to
the expansion of Article 15 of the WHO’s Framework Convention on Tobacco Control (FCTC),
which focuses on combating illicit tobacco products. According to WHO FCTC, ‘The term illicit
tobacco trade is defined as a practice or a conduct prohibited by law which relates to
production, shipment, receipt, possession, distribution, sale or purchase of tobacco products,
including any practice or conduct intended to facilitate such activity.’ Article 15 gave rise to
the WHO FCTC’s first Protocol, the Protocol to Eliminate Illicit Trade in Tobacco Products
(World Health Organization, 2013).
Amongst other factors, the Protocol is aware of the need to control the tobacco supply chain,
owing to the global tobacco industry’s historical involvement in the illicit tobacco trade to
maximise profits (U.S. National Cancer Institute & World Health Organization, 2016, World
Health Organization, 2013). The global tobacco industry has also heavily opposed any threats
to their vested interests by lobbying the government against both tax-based and non-tax
tobacco control measures (Ross, 2015, Ross et al., 2016b, van Walbeek & Shai, 2015).
Since the early 1990s, the tobacco industry has opposed the South African government’s
attempts to use tobacco tax to strengthen tobacco control (van Walbeek, 2005). According to
the tobacco industry, the prime cause of the illicit tobacco trade is the high taxation of
tobacco products, which ultimately impedes the generation of tax revenue (Joossens & Raw,
2012, Kelton & Givel, 2008, van Walbeek & Shai, 2015). van Walbeek & Shai (2015) discuss
the South African tobacco industry’s opposition to rising tobacco taxes and the tactics they
have used to combat tobacco control measures. The South African tobacco industry and
private market research companies have, in the past, published inconsistent and sometimes
exaggerated size and growth estimations, raising questions as to the reliability, credibility,
and motives behind these estimations (Blecher, 2010, Blecher et al., 2015, IARC, 2011, van
Walbeek & Shai, 2015).
3
Despite the tobacco control measures in place in South Africa, from 2015/16 to 2017/18, the
National Treasury began to see a sharp decline in tax-paid cigarette consumption (ETCP,
2018). From 2016, the 20% decline in tax-paid cigarette consumption coincided with increases
in the illicit tobacco trade (Liedeman & Mackay, 2015, van der Zee, van Walbeek & Magadla,
forthcoming 2019).
The downward trend in tax-paid cigarette consumption and associated upward spikes in the
illicit tobacco trade since 2015 have raised questions about the tobacco industry’s possible
role in illicit tobacco activity. Historical evidence of exploitative illicit tobacco practices by the
tobacco industry makes it imperative that more research be conducted in order to understand
the extent and magnitude of the illicit tobacco trade in low-and middle-income countries,
including South Africa (World Health Organization, 2013).
This thesis explores the recent upward spike in the illicit tobacco trade in South Africa, in order
to assess whether or not a relationship exists between tobacco companies and the spike in
illicit activity. The study analyses information obtained from semi-structured key informant
interviews, which were used to derive expert insights regarding the motives behind the spike
in illicit tobacco trade. This study considers the context of the political economy of tobacco
trade, while remaining grounded in economic theory. The results could potentially contribute
to government decision-making on tobacco control policies, tax revenue, and law
enforcement.
This paper is structured as follows: Section Two discusses existing literature on industry
complicity in the supply of illicit tobacco at a global and domestic level. Section Three
describes the research design of the study, why it was chosen, and how it was applied. The
section also explains how the data was handled and analysed and the associated limitations.
Section Four discusses how the market entry of competitors, and the strengthening of
government legislation, threatened the interests of the established tobacco industry, and
how they responded. Section Five provides a discussion of the study’s findings followed by a
brief conclusion in Section Six.
4
2 Literature Review
Since the 1990s the South African government has been committed to reducing tobacco
consumption (van Walbeek, 2005). This was first done by using excise taxes1 as a tool to raise
the price of cigarettes (Chaloupka, Straif & Leon, 2011). Successful implementation of
effective tobacco control measures resulted in the country being regarded as a global leader
in tobacco control (Chelwa, van Walbeek & Blecher, 2016). The country’s commitment was
reaffirmed in 2005 when it signed the WHO FCTC (Roemer, Taylor & Lariviere, 2005).
According to the World Health Organization (2003), ‘The WHO FCTC is an evidence-based
treaty that reaffirms the right of all people to the highest standard of health. The WHO FCTC
represents a paradigm shift in developing a regulatory strategy to address addictive
substances; in contrast to previous drug control treaties, the WHO FCTC asserts the
importance of demand reduction strategies as well as supply issues.’ Supply issues were
divided into the licit and illicit supply of tobacco products.
The WHO FCTC recognises the important negative consequences of illicit tobacco supply on
public health and tobacco control measures and has therefore developed the Protocol to
Eliminate Illicit Trade in Tobacco Products (van Walbeek et al., 2013). The Protocol provides a
toolkit for controlling illicit trade, which includes the use of globally integrated monitoring
systems, measures to enhance international cooperation and collaboration, and law
enforcement (World Health Organization, 2013). However, despite the country’s previous
commitment to tobacco control, South Africa has yet to ratify the Protocol. The failure to
ratify sends signals to illicit tobacco suppliers that the government is less committed to the
fight against the illicit tobacco trade.
Since the increase in domestic tobacco companies in South Africa in 2009/10, tobacco
industry participants have accused each other of complicity in supplying illicit tobacco.
Ironically, all of the industry participants have been under suspicion and in some cases found
1 According to the U.S. National Cancer Institute & World Health Organization (2016), excise tax is defined as ‘atax or duty imposed on the sale or production of selected products, such as tobacco products.’
5
guilty, of improper business conduct (Pauw, 2017, van Loggerenberg, 2014, van
Loggerenberg, 2018, van Loggerenberg & Lackay, 2016). This chapter discusses previous
instances of industry complicity in illicit tobacco trade, providing a brief overview of the
general motives behind illicit tobacco supply, followed by global and domestic instances in
which the tobacco industry was found to be complicit in the supply of illicit tobacco.
2.1 General motives behind the illicit supply of tobacco
The illicit tobacco trade is essentially the failure to pay government-imposed tobacco taxes.
The IARC (2011), Ross (2015), U.S. National Cancer Institute & World Health Organization
(2016) describe how the circumvention of taxes can take the form of tax avoidance, which is
legal, and tax evasion, which is illegal. According to Ross (2015), ‘Tax Avoidance includes legal
activities and purchases in accordance with customs and tax regulations, most of which
include the payment of some tobacco taxes and are done mostly by individual tobacco users
(e.g., cross-border shopping, duty-free shopping, Internet and mail/phone purchases), but
tobacco companies also engage in it (e.g. changing some product features or its production
process in order to reduce tax liability).’ On the other hand, tax evasion, according Ross (2015),
is defined as ‘illegal activities intended to avoid paying some or all taxes. It includes smuggling
cigarettes across borders, selling genuine cigarettes that were manufactured illegally, selling
counterfeit or illicit white cigarettes, or selling or buying cigarettes via Internet, phone or mail
without paying the appropriate taxes.’
To date, the majority of scholarly research on the illicit tobacco trade, across several
disciplines, has focused on scope measurements of tax avoidance/evasion, which indirectly
serve as indicators for the measurement of the illicit tobacco trade. Various theoretical
models have been developed to measure the scope of such trade (IARC, 2011, Ross, 2015,
U.S. National Cancer Institute & World Health Organization, 2016). No matter which scope
measurement instruments is used, however, the primary motive for engaging in the illicit
tobacco trade is profit maximisation.
To maximise their profits, illicit tobacco traders often seek out and exploit weaknesses or
vulnerabilities in countries’ economic and political systems. Certain systems can provide the
conditions that make tax circumvention practices easier and thus create the economic
6
incentives for illicit tobacco activity. IARC (2011), Legresley et al. (2008), Nakkash & Lee
(2008), Ross (2015) and U.S. National Cancer Institute & World Health Organization (2016)
identify some of these conditions: tax/price differences and magnitudes, weak tax and
customs administration and control, weak governance, corruption, duty-free shops and trade
free zones, illicit trade routes, informal distribution networks, affordability of tobacco
products, political instability and tobacco industry involvement.
As demonstrated by Ross et al. (2016a), the tobacco industry has engaged in elaborate tax
avoidance strategies in order to circumvent tobacco control mechanisms, particularly high
tobacco taxes. Some of these strategies include:
Flooding the market with a product before a new tax is imposed, thus encouraging
stockpiling. The difference in tax levels provides a profit opportunity for the
manufacturer or importer.
Exploitation of complex non-uniform tax structures. This can lead to the tobacco
industry manipulating tax systems and circumventing the prescribed taxes by
adjusting products or production processes so that products can be re-classified to a
lower tax category. Non-uniform tax structures for products may prompt tobacco
manufacturers to adjust their pricing models, lowering prices on products aimed at
price-sensitive consumers while increasing prices on products aimed at less price-
sensitive consumers.
Lowering cigarette prices, which tends to drive tobacco volume sales, increasing
tobacco consumption as cigarettes become more affordable to a wider market.
Optimising on profits by raising the net-of-tax price on products in line with, or in
excess of, the increase in tax rate, and thereafter lobbying against further government
increases in taxes. By contrast, tobacco manufacturers may also reduce their profit
margins relative to the tax rate in order to increase sales volumes so as to preserve
their original profit margins; this is more likely to affect economy than premium
brands.
Reducing the quantity of product per pack, so as to maintain the price per pack, thus
preserving the perceived affordability of the pack.
7
Reducing tax liability and profit margins by lowering products’ prices so as to influence
ad valorem excise taxes, since excise taxes are calculated as a function of the retail
price.
South Africa provides a clear example of the tobacco industry’s influence on excise rates as a
result of multinational tobacco companies (MTCs) controlling retail prices. Van Walbeek
(2010) indicated how, historically, the South African government had been successful in
reducing cigarette consumption and raising tax revenues through the imposition of excise
taxes. In response to the rise in excise taxes, however, the tobacco industry, mainly through
its representative body, the Tobacco Institute of Southern Africa (TISA) 2, heavily lobbyied
against increases in the excise tax. They believe that a strong positive relationship existed
between excise taxes and the illicit tobacco trade (Rowell, Evans-Reeves & Gilmore, 2014, van
Walbeek & Shai, 2015).
2 According to their website, ‘The Tobacco Institute of Southern African (TISA) was established in 1991 and is anon-profit organisation representing the major tobacco manufacturers and tobacco farmers in South Africa.Main business: Representative of the non-commercial, common interest of manufacturers and marketers oftobacco products as well as the tobacco growers in South Africa.’ At the time of writing the members of TISAincluded British American Tobacco South Africa, Philip Morris South Africa, JT International South Africa, ClippaSales, OTP Distributors, Imperial Tobacco Southern Africa, Universal Leaf South Africa, Dimon South Africa,Tobacco Traders and LTP Tobacco.
8
2.2 Industry complicity in illicit tobacco supply
Historical MTC complicity in the illicit tobacco trade has been found in Africa, the Middle East,
Europe, Asia, and the Americas (Joossens & Raw, 2008, Joossens & Raw, 2012, Joossens et al.,
2016, Kelton & Givel, 2008, Lee & Collin, 2006, Legresley et al., 2008, Nakkash & Lee, 2008).
Kelton & Givel (2008) discuss how the ‘1998 legal settlement in the case of State of Minnesota,
et al., v. Philip Morris, Inc., et al. and the subsequent 1998 Master Settlement Agreement’,
resulted in the release of previously undisclosed tobacco-industry documents. These
documents exposed the intricate tax evasion practices of MTCs and the role of smuggling. The
nature of smuggling has changed over time, from large to small batches of illicit tobacco
moving across borders. What has remained consistent during this time, however, is MTCs
complicity in either supplying illicit tobacco or the failing to control their supply chains,
despite knowing that their products were destined for illicit markets (Joossens et al., 2016).
Large-scale smuggling by MTCs has, in some instances, led to MTCs’ own admission of
complicity (Joossens & Raw, 2008, Kelton & Givel, 2008). A letter sent by president and CEO
of Imperial Tobacco Ltd, Don Brown, to a senior executive of Imperial Tobacco Ltd in 1993 (as
cited by Kelton & Givel, 2008) states that: “As you are aware, smuggling cigarettes (due to
exorbitant tax levels) represents nearly 30% of total sales in Canada, and the level is growing.
Although we agreed to support the Federal government’s effort to reduce smuggling by
limiting our exports to the U.S.A., our competitors did not. Subsequently, we have decided to
remove the limits on our exports to regain our share of Canadian smokers. To do otherwise
would place the long-term welfare of our trademarks in the home market at great risk. Until
the smuggling issue is resolved, an increasing volume of our domestic sales in Canada will be
exported, then smuggled back here for sale.” According to the chairman of BAT in 2000 (as
cited by Joossens & Raw, 2008), ‘‘Where any government is unwilling to act or their efforts
are unsuccessful, we act, completely within the law, on the basis that our brands will be
available alongside those of our competitors in the smuggled as well as the legitimate
market.”
In many instances MTCs have not been held accountable or been sufficiently penalized for
In fact, Philip Morris International (PMI), Japan Tobacco International (JTI), British American
Tobacco (BAT), and Imperial Tobacco Limited (ITL), in an attempt to avoid litigation, signed
various agreements with the European Union (EU) to fight collaboratively against the illicit
tobacco trade. The agreements themselves contained loopholes, which protected MTCs from
the consequences of complicity in supplying illicit tobacco (Joossens et al., 2016).
Industry complicity in Canada remains one of the most notorious instances of tobacco
smuggling. Beginning in the 1980s, Canadian tobacco manufacturers exported tobacco
products to the United States (US) and thereafter illegally reimported the products via Native
American reservations and Canadian First Nation reserves. This was done in order to take
advantage of tax/price differentials between the two countries (Kelton & Givel, 2008). In the
1990s, local tobacco manufacturers in Canada actively participated in smuggling, exporting
cigarettes to the US and smuggling the cigarettes back into Canada without any leakage into
the US domestic market (Joossens & Raw, 2008, Joossens & Raw, 2012). According to Joossens
& Raw (2008) and the U.S. National Cancer Institute & World Health Organization (2016), in
2008, Canadian tobacco manufacturers, ITL, and Rothmans Benson and Hedges pleaded guilty
to illicit tobacco trading between 1989 and 1994. The companies were fined CA$1.5 billion
for illicit tobacco activity. In a similar case, according to Joossens & Raw (2008), significant
quantities of two ITL brands, Regal and Superkings, were exported from the UK to Latvia,
Kalingrad, Afghanistan, Moldova and Andorra, and a large proportion of the exports were
illegally smuggled back into the UK.
In the late 1990s and early 2000s, the European governments and European Community
suspected that American tobacco companies, specifically PMI and RJ Reynolds, were taking
advantage of tax/price differentials between countries by exporting American cigarette
brands to countries with lower tobacco taxes, and then illegally smuggling products back into
the US (Joossens & Raw, 2008, Joossens et al., 2016). According to Joossens et al. (2016),
the EU alleged in 2002 that RJ Reynolds were engaging ‘in organised crime, money laundering
and narcotics trafficking and in transactions that financed both the Iraqi regime under Saddam
Hussein and terrorist groups’. There have also been numerous instances of cigarettes which
have been produced in one country and consumed in another country, without the necessary
10
taxes been paid, such as illicit whites.3 According to Joossens & Raw (2012), illicit whites
dominated cigarette consumption in Libya and were produced in Luxembourg and Bulgaria.
Another example is the Jin Ling brand which was produced in Russia and consumed within
the EU (Joossens & Raw, 2012). In 2014, BAT was fined £650 000 by UK tax authorities for
over-supplying their brands to the Belgian market (Joossens et al., 2016).
Since the 1980s, the global tobacco giant, BAT, has engaged on numerous occasions in various
forms of illicit tobacco trade in pursuit of their strategic corporate objectives (Gilmore, AB &
McKee, M, 2004, Gilmore, AB. & McKee, M., 2004, Lee & Collin, 2006, Legresley et al., 2008).
Smuggling has been used as a strategy to gain entry into otherwise restricted markets and to
compete for market share. Such practices have been observed in Asia, the former Soviet
Union, the Middle East, and Africa, among others (Gilmore, AB & McKee, M, 2004, Gilmore,
AB. & McKee, M., 2004, Lee & Collin, 2006, Legresley et al., 2008). A number of studies
(Joossens et al. (2016), Kelton & Givel (2008), Legresley et al. (2008), Nakkash & Lee (2008),
Rowell, Evans-Reeves & Gilmore (2014) that have analysed newspaper articles, company
document depositories, tobacco company press releases, court judgements, and litigation
show how MTCs have either been complicit in the illicit tobacco trade or have used media
platforms to influence stakeholders’ understanding of the nature and magnitude of the illicit
tobacco trade.
Collin et al. (2004), whose study included the analysis of confidential documents from BAT’s
Guildford depository,4 argued that the evidence indicated that, in order to gain access to
restricted markets, BAT smuggled tobacco products into Burma, Vietnam, Thailand, and
Bangladesh. Nakkash & Lee (2008) show how BAT and PMI, in an attempt to gain access to -
and expand - market share, took advantage of weak governance and political unrest during
the Lebanese civil war. The war resulted in the eradication of local cigarette production and
led to the influx of contraband to the Lebanese market. Even after the civil war ended in the
3 Ross et al., (2016) define illicit/cheap whites as, ‘cigarettes manufactured by legitimate business enterprises,but a large share of the production is sold illegally outside the jurisdiction where they are produced.’4 The Guildford depository is a collection of documents which contain detailed activities of the tobacco industry;it is located in the United Kingdom and is run by BAT.
11
1990s, BAT continued to supply the Lebanese tobacco market with licit and illicit cigarettes.
BAT also exploited transition economies, such as the former Soviet Union (FSU), which it used
to gain entry into the Chinese market (Gilmore, AB. & McKee, M., 2004). In line with their
corporate objectives and in an attempt to penetrate the lucrative Chinese market, BAT used
a variety strategies to overcome barriers to entry, including restructuring their Asian business
divisions, so as to supply private traders and to control prices (Lee & Collin, 2006).
The African continent has not been free from illicit tobacco activities. Legresley et al. (2008),
in an analysis of BAT documents from the Guildford depository and the BAT Document
Archive, indicated that at least 40 of 54 African countries were exposed to smuggling and that
smuggling formed a key part of the company’s corporate strategy. They also show that BAT
took advantage of the opportunities available for illicit activity in Zaire (DRC), Togo, Ghana,
and Angola. A study of BAT’s Guildford depository, conducted by Wen et al. (2006) and Collin
et al. (2004), indicated that other leading global tobacco companies were also complicit in
illicit tobacco activity. BAT documents also revealed PMI’s proposed plans to engage in illicit
activity in Nigeria to support their arguments against government increases in taxes
(Legresley et al., 2008).
MTCs have, over decades, been complicit in the illicit tobacco trade despite collaborating with
governments and various agencies in the fight against it. These practices have cast doubt on
the credibility of their role in the fight against the illicit tobacco trade. Many scholars have
appealed to the WHO FCTC and governments to reject industry interference as part of their
commitment to eliminate the illicit tobacco trade (Legresley et al., 2008, Nakkash & Lee,
2008, Rowell, Evans-Reeves & Gilmore, 2014). It is also stressed in Article 5.3 of the FCTC
which requires “Parties to protect their tobacco control and public health policies from
commercial and other vested interests of the tobacco industry” (van Walbeek & Filby, 2018).
12
2.3 Industry complicity: The South African context
According to van Loggerenberg (2018) and van Loggerenberg & Lackay (2016), tobacco
smuggling has been a lucrative business in South Africa since 1994, and by 2013 ‘had reached
epidemic proportions’. Van Loggerenberg & Lackay (2016) indicated that, in 2008, South
African Revenue Services (SARS) confiscated 45 million illicit cigarettes from Masters
International Tobacco Manufacturing. The controversial owner of the business was linked to
the South African Arms deal (van Loggerenberg, 2018, van Loggerenberg & Lackay, 2016).
According to Corruption Watch (2018), ‘The Arms deal was not a single event, but rather a
series of corruption scandals and cover-ups’.
Escalating illicit activity within the country prompted a SARS investigative unit to probe into
the modus operandi of the illicit tobacco value chain (Project Honey Badger). Their findings
indicated the possibility of unlawful business practices by fifteen tobacco companies (Pauw,
2017, van Loggerenberg, 2018, van Loggerenberg & Lackay, 2016). Investigations also
exposed a complex and intricate network of money, which was sourced from smuggling
activities, and which was used to pay “influential businessmen, gangsters and politically
connected individuals” (Pauw, 2017). A domestic tobacco company, Carnilinx, was found
guilty of unpaid taxes. SARS seized ‘over R200 million worth of illicit tobacco’ and an affidavit
by Carnilinx indicated that ‘the company unlawfully and wrongfully smuggled two tonnes of
tobacco every week for 40 weeks to avoid paying excise duty’ (Pauw, 2017:193). They were
not the only participants in the underground illicit tobacco world: British American Tobacco
South Africa (BATSA) was exposed in the media for using spies to infiltrate government
agencies and report on their competitors’ businesses (Walter, 2015).
From 2015, South Africa’s tobacco economy was revealed to be multi-layered, in that it
involved corruption, tobacco industry state infiltration, and industry espionage. These had
significant negative consequences for the country both economically and politically. The
National Treasury’s Budget Review reveals that, since 2015, the country witnessed a sudden
decline in tax-paid cigarettes which could not be attributed to economic factors entirely and
indicated an increase in the trading of illicit tobacco (van Walbeek, 2014). Studies by van der
Zee, van Walbeek & Magadla (forthcoming 2019) show how the proliferation of low-
13
priced/illicit cigarettes penetrated all racial and socio-economic groups in South Africa. Case
studies by Liedeman & Mackay (2015) indicate the increased availability of illicit cigarettes in
Delft, Cape Town, between 2010/11 and 2015.
The change in conditions that allowed illicit tobacco to flourish from 2015 was linked to the
appointment of the new SARS commissioner, Tom Moyane, in 2014. Moyane’s leadership
decisions severely weakened SARS law enforcement capacity, resulting in conditions that
allowed undeclared cigarette production to thrive (Pauw, 2017). During his time as SARS
commissioner, the tax authority witnessed leadership purges and multiple state commissions
of inquiry into SARS, including SARS tax administration and governance.
The “epidemic proportions” of the illicit tobacco trade mentioned by van Loggerenberg &
Lackay (2016) in 2013 was dwarfed by subsequent developments. A 2018 Ipsos study,
commissioned by the Tobacco Institute of Southern Africa (TISA), showed that undeclared
cigarette production was spiralling out of control, with three out of four non-organised shops5
selling cigarettes below the amount of the combined excise tax and VAT (TISA, 2018b). The
cigarettes were deemed to be illicit, as the full tax could not have been paid on them. The
study also identified a domestic tobacco manufacturer, Gold Leaf Tobacco Company, as the
main perpetrator, claiming that they accounted for 75.1% of sales at a price below the cost of
the taxes. A follow up study conducted by Ipsos in the latter part of 2018 indicated that, within
three months, illicit trade in the informal market increased from 33% to 42% (TISA, 2018a).
Given the tobacco industry’s history of avoiding, and at times evading, the tobacco tax, this
thesis looks at the factors behind the recent upward spike in the illicit tobacco trade in South
Africa. The section that follows will specify the qualitative methods used.
5 According to the Ipsos study, non-organised shops included ‘independent small and medium businesses,including spazas, general dealers, corner cafes and hawkers”, excluding “mobile hawkers, taverns and shebeens”.
14
3 Research Methods
The aim of this study is to explore the recent upward spike in the illicit tobacco trade in South
Africa. A qualitative method, using data collection and analysis was deemed most appropriate
for this study. This took the form of semi-structured key informant interviews. This section
details the method used and is structured as follows: first a brief overview of the chosen
research design will be given, followed by a detailed description of the application of the
research design. The section will close with a discussion of ethical considerations.
The methods suggested by DTC interviewees reveal the tobacco industry’s attempts to
influence state decision-making on tobacco tax structures, for their own self-preservation,
while discounting public health consequences. One of the two DTC interviewees, who
suggested the above-mentioned methods, indicated that transformation was necessary to
shift market dominance away from BATSA to a specific DTC. The suggested methods must
therefore be viewed with caution in that it is not transformation for the upliftment of all
previously disadvantaged group-owned companies who were previously denied market entry
that is sought, but rather a shifting of power dynamics. The aim is to establish a new kingpin
within the South African tobacco industry.
Despite DTCs’ arguments regarding the lack of government effort on transformation, all DTCs
indicated support for the Draft Control of Tobacco Products and Electronic Delivery Systems
Bill, 2018, which was opened for public comment on 9 May 2018. The key areas of the Bill
that won the favour of DTCs were related to “standardisation of packaging.” DTCs were in
favour of plain packaging and the removal of branding and logos since it ensures uniformity
36
of all brands. The unanimous agreement amongst DTCs is that, for the first time, there will be
fair competition on retail shelves, thus levelling the playing field in terms of brand
competition. They believe that, if plain/standardised packaging is introduced, BATSA will no
longer be able to use anticompetitive business practices in the form of retail shelf
management control. Standardisation is therefore perceived by DTCs as evidence of
government’s commitment to transform the tobacco market.
37
4.3 Suspicions of industry complicity in illicit tobacco trade (from 2012 to 2014)
The entry of DTCs to the market, followed by the rise in the illicit tobacco trade in 2010, raised
suspicions at South African Revenue Services (SARS) regarding tobacco industry business
practices (van Loggerenberg & Lackay, 2016). Further probing into the matter resulted in a
letter being sent to tobacco industry representative bodies (TISA and FITA) in 2012, regarding
SARS’ suspicions of tax and customs non-compliance activities by fifteen domestic and
multinational tobacco companies (van Loggerenberg & Lackay, 2016). The letter, which was
sent by the Group Executive of Projects, Evidence, Management and Technical Support of
SARS at the time, Johann van Loggerenberg, warned of tobacco industry participation in tax
evasion, smuggling, concealed international transactions, uncompetitive business practises,
exploitation of law enforcement agencies, spying, information peddling, and undue access to
and influence over state institutions (van Loggerenberg, 2014, van Loggerenberg, 2018, van
Loggerenberg & Lackay, 2016).
Around 2013, while SARS was investigating the tobacco industry, the MTCs, and BAT plc
(British American Tobacco’s London-based headquarters) in particular, sought insider
information of the business activities of DTCs. Much of their need for such information was
based on BATSA’s suspicion of DTCs’ complicity in the illicit tobacco trade and the associated
negative impact on their market share. In order to attain such information, they infiltrated
state agencies, via the National Intelligence Authority (later renamed State Security Agency),
which established the Fair-Trade Independent Tobacco Association (FITA) around June 2012
(Walter, 2015). At the time, FITA was established under the guise of being the industry
representative body for DTCs. The shroud of secrecy regarding FITA’s establishment was
subsequently exposed in the media, that is, that it was created in order to spy on DTCs (Pauw,
2017, van Loggerenberg, 2018, van Loggerenberg & Lackay, 2016, Walter, 2015).
FITA was set up by Attorney Belinda Walters, under instructions from the State Security
Agency (SSA), with the objective of spying on DTCs (Walter, 2015). In her affidavit, she stated
that she was tasked with spying on DTCs and shared the information with the Anti-Illicit
Tobacco Task Team, which was composed of the National Prosecuting Authority (NPA), SSA,
the Directorate for Priority Crime Investigation (Hawks), and Police Crime Intelligence; the
38
Team excluded SARS (Walter, 2015). The Anti-Illicit Tobacco Task Team had close ties with
Forensic Security Services (FSS), which was funded by TISA/BATSA.
According to Walter (2015), “FSS is renowned in the tobacco industry as the security arm or
contractors acting under instruction and mandate of TISA and/or its members, particularly
British American Tobacco (BATSA). It is unknown whether FSS is a registered security service
provider or what the exact contractual arrangements between FSS and TISA are. It is, however,
known that the business’ operations are very lucrative and tens of millions of Rands are paid
to the business each year for its services in the tobacco industry.” TISA/BATSA were thus
paying FSS for private investigative purposes, which included infiltrating state investigations
in order to gain insider information on DTCs.
Media exposés of BAT’s participation in “industry espionage” increased rapidly (Pauw, 2017,
van Loggerenberg & Lackay, 2016). What surfaced was a network of agents whom BAT paid
through obscure payment systems using Travelex cards; they declared payment transactions
incorrectly so as to mask their spying activities (Pauw, 2017, van Loggerenberg, 2014, van
Loggerenberg & Lackay, 2016). This was confirmed in an affidavit by Walters, who was a
recipient of such payments. Walters was paid to spy on DTCs and acted as a conduit for BATSA
state infiltration (Walter, 2015). Walters’ affidavit also included statements regarding her
triple role as informant for the SSA and BAT plc and the attorney for the DTC, Carnilinx. She
said that she was introduced to BAT plc through the SSA (Walter, 2015). Aside from holding
multiple positions, she also infiltrated SARS by embarking on an intimate relationship with
Johann van Loggerenberg. During their relationship, she also confessed to van Loggerenberg
that she was an informant for BAT plc, SSA, and the Tobacco Task Team (Pauw, 2017, van
Loggerenberg, 2014, van Loggerenberg & Lackay, 2016). By the end of 2013, Walters stepped
down from her position as chairperson of FITA.
BAT’s payments in the form of international Travelex cards eventually raised suspicions at
SARS. SARS also became increasingly suspicious of TISA/BATSA state and industry interference
and their abuse of the Anti- Illicit Tobacco Task Team which was aiding anticompetitive
business practices by disclosing competitor business practices to BATSA. In 2014, SARS raised
their growing concerns and suspicions with the NPA and specifically mentioned tobacco
39
industry interference by BAT, TISA, and the FSS (van Loggerenberg & Lackay, 2016). Despite
evidence of industrial espionage, including 12 000 online documents available via Twitter
regarding unlawful conduct by BATSA, both TISA and BATSA denied any association with
spying and the use of fraudulent payment systems.
The findings of law enforcement agencies’ investigations into the business activities of both
DTCs and MTCs, coupled with the allegations of industrial espionage by TISA/BATSA, highlight
two important points:
the tobacco industry as a whole was complicit in some form of tobacco tax avoidance,
and in some cases tax evasion;
new competitors were posing a severe threat to BATSA’s interests.
The infiltration of state institutions by BATSA/TISA indicates the extent to which BATSA would
go to maintain the traditional tobacco industry power dynamics and protect their interests.
40
4.4 The unravelling of the multi-layered tobacco industry (from 2014)
In early 2014, Walters disclosed to FITA member, Carnilinx, and SARS that she was juggling
multiple conflicting roles simultaneously (Walter, 2015). In the same year Walters and van
Loggerenberg’s romantic relationship ended. This led to the unravelling of the multi-layered
tobacco industry, disrupting the stability of SARS and exposing state capture by the industry.
The unravelling was set off when Walters made allegations against van Loggerenberg of
impropriety at SARS, including, amongst other things, the illegal monitoring and interception
of political figures in the country (Pauw, 2017, van Loggerenberg, 2014, van Loggerenberg &
Lackay, 2016). She accused van Loggerenberg of leading a rogue unit within SARS who were
spying on politicians and disclosing taxpayer information, thus breaching taxpayer
confidentiality (van Loggerenberg, 2014, van Loggerenberg, 2018). What followed was a
heavily-publicised ‘SARS rogue unit’ campaign. Walters’ accusations regarding the rogue unit
were refuted and dismissed in the state commission of inquiry into SARS, however the
accusations reshaped important state institutions in the country (van Loggerenberg, 2018).
Walters’ accusations prompted the Acting Commissioner of SARS at the time, Ivan Pillay, to
establish an external panel, referred to as the Kanyane Panel, to examine the accusations.
Despite the Kanyane Panel finding that no breach of law had occurred, a second panel, the
Sikhakhane Panel, was initiated to investigate the matter further. One of the report’s findings
stated: “While SARS remains an efficient and effective organisation, the unlawful
establishment of a unit operated ostensibly in a convert manner, has created a climate of
intrigue, fear and subterfuge within the organisation” (Sikhakhane, 2014). Against this
backdrop, President Jacob Zuma appointed Tom Moyane as the new SARS commissioner in
2014. Moyane, upon receiving the Sikhakhane reports findings, suspended Ivan Pillay.
This was followed by the disbanding of the SARS executive committee and special
investigative units (project Honey Badger), leading to an exodus of senior managers, the very
people who built the once world-class and globally respected tax administration and
collection agency (van Loggerenberg & Lackay, 2016). In the 2018 Nugent Commission of
Inquiry into Tax Administration and Governance at SARS, Judge Frank Kroon: “reported to the
Minister, and issued a media statement, saying the unit was unlawful, but in evidence he told
41
the Commission that was not a conclusion reached independently by the Board, but had been
adopted from the Sikhakhane panel, and he had come to realise it was wrong. Indeed, he
supported the re-establishment of capacity to investigate the illicit trades, which we
recommend” (Nugent, 2018). Ultimately however, Moyane’s decisions resulted in the
crippling of the agency by severely weakening the ability of SARS to act as tax administrators,
as law enforcers in terms of tax collection, and as investigators of complex tax crimes, thus
leaving the country vulnerable to exploitation (van Loggerenberg & Lackay, 2016).
Previous SARS investigations of tobacco-industry related tax evasion, during Project Honey
Badger, had exposed the tobacco industry’s evasive tax practices and the multi-layered
tobacco industry which was engaging in parallel licit and illicit tobacco trade. One of the
findings of Project Honey Badger was under-declared production by tobacco manufacturers,
prompting SARS to raid the manufacturing premises of suspected perpetrators. Amalgamated
Tobacco Manufacturing (ATM) was one of the offenders.
Until 2011, Edward Zuma, the son of the then-President of South Africa, was one of ATM’s
directors. This prompted further questions in the media regarding tobacco industry complicity
in the illicit tobacco trade and the participation of influential political affiliates and “state
capture” in relation to the illicit tobacco economy (Pauw, 2017). Because of the raids, illicit
tobacco traders became concerned about SARS’s commitment to tackling illicit tobacco trade.
This prompted some of the tax-evading DTCs to disclose their tax-evasive practices to SARS.
Domestic tobacco companies, Carnilinx and ATM were among the offenders that “came
clean” with SARS.
42
4.5 Under-declared production and its impact on excise revenue (from 2015)
By 2015 the negative consequences of illicit tobacco activity began to be evident in the South
African economy. From that year, the National Treasury began witnessing declines in tobacco-
related excise revenue. According to the Budget Review, between 2016 and 2018 the number
of tax-declared cigarettes decreased by approximately 20%. According to interviews with
tobacco-control experts, the decrease in cigarette consumption within the country could not
be explained by dramatic decreases in smoking patterns (Figure 2).
Figure 2: Cigarette real prices and official consumption
Source: The Economics of Tobacco Control Project (ETCP) calculations, derived from various issues of the National Treasury
Budget Review (1980-2018). Real excise revenue is displayed in millions of Rands, with 2016 as the base year. Consumption
is in millions of 20-packs.
Figure 2 is a historical representation of how South Africa applied excise taxes as a means of
reducing cigarette consumption. Official cigarette consumption (tax-paid consumption) is
represented on the secondary Y-axis (orange line) while the primary Y-axis represents the
price of cigarettes in real terms. Over a period of about three decades, starting from the
1960s, the price of cigarettes declined in real terms as the price of cigarettes increased by less
43
than the inflation rate. Cigarettes became more affordable, which coincided with a very
strong increase in cigarette consumption. By the mid-1990s, cigarette prices started
increasing very sharply and from about 2010, they have remained relatively constant. Until
2000, excise taxes had a positive impact on reducing cigarette consumption; consumption
was going down and real cigarette prices were increasing. From 2005, consumption patterns
began to change, despite the price of cigarettes staying relatively constant, consumption
began declining. The illicit tobacco trade was not a major concern in South Africa until
2009/10.
Since 2009/10, there has been a substantial decrease in the consumption of tax-paid
cigarettes, with SARS collecting less money in cigarette taxes. Sharp declines in 2009/10
occurred in conjunction with a global recession and upswings in the illicit tobacco trade (van
Walbeek & Shai, 2015). The even more drastic decline in tax-paid consumption since 2015
suggested another upswing in illicit tobacco trade. This discovery began to raise serious
questions regarding the state of the illicit tobacco trade in South Africa.
Non-DTC interviewees generally agreed that the sudden downward move in tax-declared
cigarette consumption was the result of an upward spike in the illicit tobacco trade. DTC
interviewees, however, offered alternate explanations for the sudden decline in tax-declared
cigarettes, including the growth in popularity of electronic delivery systems and a decrease in
smoking prevalence because of the country’s shift towards healthier lifestyles. One DTC
interviewee was of the opinion that both licit and illicit cigarette consumption was increasing
in recent years, with smokers shifting to more affordable cigarette brands. When questioned
further, none of the interviewees could support these arguments by any evidence.
From 2015, there was a distinct shift in the tobacco-trading environment, in that the modus
operandi of the illicit tobacco trade shifted from smuggling to under-declaring cigarette
production. According to the former Chief Director in the Economic and Tax Analysis Unit at
National Treasury, upward spikes in the illicit tobacco trade were the result of problems with
SARS’ ability to enforce the law. He indicated that the substantial slowdown in tobacco-
related excise revenue between 2014 and 2016, and the sharp decline in revenue from 2016
44
to 2018, was attributable to smuggling and the rise of under-declared production (van Wyk,
2019).
The vast majority of non-DTC interviewees were of the opinion that the appointment of Tom
Moyane as SARS commissioner in 2014, followed by his instruction to put an end to the SARS
investigative units, allowed the illicit trade to flourish. They believe that inadequate levels of
experienced personnel at SARS and the overall weakening of SARS’ law enforcement capacity
resulted in a free for all attitude in which illicit tobacco traders could thrive.
The destabilisation of SARS’ law enforcement role was exacerbated in 2015 by the
dismantling, on instructions from Moyane, of important institutions, including the Large
Business Centre (Joffe, 2018). The Large Business Centre was a specialised unit responsible
for, amongst other things, the investigation of tax evasion and illicit cash flows, as well as the
analysis of the complex financial structures of large corporations (Joffe, 2018, SARS, 2018).
DTC interviewees did not agree with the opinion that Moyane played a role in creating the
conditions which allowed the modus operandi of the illicit tobacco trade to shift.
4.5.1 DTCs: internal shifts in power dynamics
One respondent from a DTC acknowledged that there had been a change from smuggling,
which was dominant prior to 2014, to under-declared cigarette production, which was
dominant from 2014 onward. The interviewee indicated that all DTCs were under-declaring
production from 2015. He confirmed his company’s involvement in both smuggling and
under-declared production during the periods in which each was more prevalent. The
interviewee did not comment on why the shift occurred and did not believe that the change
in leadership at SARS played a role.
Interviewee justification for the shift in modus operandi revolved around a disruption of the
agreed-upon power dynamics amongst DTCs. It alluded to a breach of agreement between
DTCs, which involved maintaining a form of quota system whereby each DTC would supply a
specific quantity of illicit cigarettes to the market. Abiding by the agreement ensured that all
DTCs were profiting from the lucrative gains associated with the illicit tobacco trade while
maintaining a certain power balance amongst DTCs.
45
The DTC interviewee explained that, as of 2014, the disparities in price amongst cheap
cigarette brands was widening as a result of certain DTCs reducing the price of their cigarette
brands in an effort to attain the highest profits in the shortest time. This resulted in the market
share amongst DTCs shifting towards lower-priced cigarette brands, and thus other DTC
brands at higher price points were losing market share to the lower-priced brands. The
impromptu change in pricing by some DTCs breached the agreement that existed between
DTCs, by which each DTC agreed to maintain certain price points. This disrupted the power
dynamics of the DTCs, leading to a price war between DTCs and the flooding of the market
with illicit cigarettes.
In response to the breach of agreement, one DTC interviewee adjusted his business strategy
so as to recoup his company’s market share through sales in both the formal and informal
market. The strategy included the launching of a new cigarette brand in 2015, the purpose of
which was to flood the informal market with large volumes of undeclared cigarettes, via
informal retailers. The brand was positioned at a price point that was lower than all other
cheap cigarette brands. The DTC took advantage of their well-established distribution
networks in the informal market to ensure that the under-declared cigarette brand deeply
penetrated the market. Declared production of the brand was distributed to formal retailers,
where it was priced at a price point higher than other cheap cigarette brands but substantially
lower than international cigarette brands.
By penetrating the formal market with the new brand, the DTC began to gain market share
from international cigarette brands. The DTC was selling declared and undeclared cigarettes
to formal and informal markets, respectively, and thus gaining share from both markets. The
interviewee claimed that this was the primary reason for the upward spike observed in the
illicit tobacco trade since 2015. What the above explanation indicates is the extent to which
DTCs will go to protect their stakes and to maintain a predetermined power dynamic amongst
themselves. Despite the DTCs’ narrative of transformation as a means of shifting the power
dynamic away from the traditionally established multinational tobacco players, a parallel
power structure also exists amongst DTCs.
46
In an attempt to establish a stronghold within the South African tobacco market, DTCs, like
BATSA before them, began to infiltrate state institutions, mainly through funding
controversial South African political figures. Carnilinx is one of the domestic players that has
been revealed to have funded political figures. The co-director of Carnilinx, Karl Phillips, gave
Julius Malema R1 million to settle his outstanding tax bill with SARS. In 2014, the alleged
criminal and tobacco-tax evader, and also a co-director of Carnilinx, Adriano Mazzoti, paid
R200 000 for the registration of Julius Malema’s political party, the Economic Freedom
Fighters (Pauw, 2018). Julius Malema at the time was trying to establish a political party to
contest the 2014 presidential elections. Mazzoti enabled him to realise his ambition. Mazzoti,
however, seems to have no political party affiliation per se and would appear to mix with
influential political figures in the hope of influencing state decision-making to favour his
business. In 2017, photographs appeared in the media of Mazzoti, his business partner,
Mohammadh Sayed, and a leading political party presidential candidate, Nkosazana Dlamini-
Zuma. Mazzoti is believed to be one of the funders of Dlamini-Zuma’s 2017 presidential
campaign.
Another DTC, and an alleged tobacco-tax evader, who also infiltrated state institutions in the
interests of his business, is Yusuf Kajee, owner of Amalgamated Tobacco Manufacturing
(ATM). According to van Loggerenberg & Lackay (2016), Kajee influenced state decision-
making through his business partner and the ex-president’s son, Edward Zuma, who
facilitated the securing of Kajee’s cigarette production license. According to Pauw (2017),
Kajee also made indirect payments to fund the upgrade of ex-president Jacob Zuma’s
controversial Nkandla homestead.
47
4.6 MTCs recent tactics
Since 2015, undeclared cigarette production by DTCs was seriously affecting BATSA’s market
share and profit margins, and BATSA was struggling to maintain control of the South African
tobacco market. By 2018, BATSA’s interests were severely threatened by proposed legislative
changes and the loss of market share to rising competition. In response to these threats,
BATSA/TISA sharpened their defence tactics.
4.6.1 Threats posed by government
With the aim of changing the Tobacco Control Products Act of 1993, the Department of Health
published the Draft Control of Tobacco Products and Electronic Delivery Systems Bill, 2018,
for public comment. The Bill included, amongst other things, the standardisation of
packaging. In response, TISA publicly opposed the Bill, indicating that the government should
reassess their priorities by addressing the illicit tobacco trade rather than imposing stricter
tobacco control measures. In line with globally-observed MTC tactics, TISA persistently argued
that stricter tobacco control measures would only further stimulate the illicit tobacco trade
(Rowell, Evans-Reeves & Gilmore, 2014). The chairman of TISA, Francois van der Merwe,
stated that “we predict strong opposition from small business to the bill's restrictions on point-
of-sale advertising” (Kahn, 2018b).
What followed in the media was a public denouncement by trade unions and representative
bodies of the new Bill, some of whom embarked on protest action in opposition to the Bill
(Mahlokwane, 2018). The Food and Allied Workers Union (FAWU) whose “aim is to organise
all workers in the food industry (including the primary and secondary agricultural sectors) in
South Africa into one union”, and whose members include BATSA, responded negatively to
the Bill. Their strong opposition to the Bill included arguments related to the perceived
negative consequences of the Bill on microbusinesses whose livelihood they claim, is reliant
on cigarettes sales. They also stated that the Bill will further stimulate the illicit tobacco trade,
which would threaten the job security of the most vulnerable socio-economic groups. These
groups rely heavily on the legal tobacco industry for employment.
48
Their narratives coincided with narratives promulgated by TISA/BATSA, that is, narratives
related to stimulation of the illicit tobacco trade and job loss. Another opponent of the Bill
was the South African Informal Traders Alliance (SAITA), who represent informal traders,
street vendors, and microbusinesses. Their rejection of the Bill mimicked those of FAWU and
TISA/BATSA. BATSA, amongst others, has made financial contributions to their Alliance. Other
groups who also denounced the Bill included AgriSA, SA Spaza and Tuckshop Association
(SASTA), and eKasi Entrepreneurship Movement (Kahn, 2018a).
The opposition to the Draft Bill is by no means the first time that MTCs have lobbied the
government against the strengthening of tax- and non-tax related tobacco-control measures
(Smith, Savell & Gilmore, 2013). Historically, BAT has argued that increases in excise taxes
lead to increases in the illicit tobacco trade when in fact the illicit trade is directly linked to
inflated retail prices, which, in South Africa, are set by BATSA (Ross & Vellios, 2015, Ross et
al., 2016a, Ross et al., 2016b, The World Bank, 1999, van Walbeek & Shai, 2015). BATSA’s
opposition to increases in the excise tax is predominantly based on the argument that a rise
in excise taxes increases the incentive to engage in the illicit tobacco trade and thus excise
taxes fuel illicit trade.
In response to such claims, a representative of the National Treasury stated, “I’ve got very
little sympathy for that view, actually no sympathy for that view, to be honest.” What BATSA
persistently fail to mention in their campaigns is that rising excise duties negatively impact
cigarette profit margins and this is the primary reason why BATSA is opposed to increases in
excise taxes. As indicated by one DTC interviewee, “BATSA generate reports regarding illicit
tobacco trade and one of the solutions that they advocate is always the reduction of or keeping
the excise rate at a constant. This is only to serve their agenda of protecting their profit
margins.”
BATSA have used the findings from privately commissioned research studies to oppose
increases in excise taxes. According to research commissioned by BATSA, and conducted by
economic consulting company, Econometrix: “ considering the high price elasticity for tobacco
products, holding excise at current levels is the only way to prevent further erosion of the tax
base, while enforcement measures are implemented to curb the illicit tobacco trade” (Niselow,
49
2019). Econometrix also “recommends a price freeze be implemented until the capacity of the
South African Revenue Service is improved and law enforcement authorities clamp down on
illicit cigarettes” (Niselow, 2019).
4.6.2 Threats posed by competitors
By 2018, the shifting power dynamics within the tobacco industry prompted TISA/BATSA to
embark on deliberate media campaigns to fight the competitors that most threatened their
interests. TISA/BATSA were of the opinion that law enforcement authorities were simply not
doing their job and they wanted to compel the government to act. One month after the Draft
Control of Tobacco Products and Electronic Delivery Systems Bill was opened for public
comment, TISA embarked on a national media campaign. The campaign was built on the
findings of a TISA/BATSA funded study which measured the illicit tobacco trade in South
Africa. TISA commissioned a private market research company, Ipsos, to conduct a study on
the South African tobacco market. Wave 1 of the study occurred in June 2018, and wave 2
occurred in September 2018. The study’s findings centered around DTCs’ complicity in the
supply of under-declared cigarettes and the associated loss to the fiscus.
The methodology included retail audits, in which data was collected from store-based records
which were shared by store owners or employees (TISA, 2018b). In order to estimate the size
of the retail universe, a retail census was first conducted, and a representative sample was
selected and used for retail audit purposes. The audit occurred in non-organised shops, which
the study defined as, ‘independent small and medium businesses, including spazas, general
dealers, corner cafes and hawkers”, excluding “mobile hawkers, taverns and shebeens”.
Audits were conducted in 2058 outlets, at the middle and the end of the month. The
information gathered included cigarette purchases by outlet, cigarette selling prices, cigarette
manufacturers, cigarette brands, and sales format.
The report included a disclaimer that: ‘Figures and statistics referred to represent an industry
view based on external research and publicly available market information. The definition of
‘illicit trade’ for purposes of this document includes any product sold to consumers below
R17,85, and/or being non-compliant to the Tobacco Products Control Act, No 83 of 1993 (as
amended). The various brands referred to herein are assumed to be manufactured and/or
50
distributed by the corporate entities who publicly claim to do so. TISA accepts no responsibility
or liability whatsoever with regard to the information or statistics quoted incorrectly or out of
context from this presentation by any person.’
Wave 1 of the study’s findings indicated that 33.4% of cigarettes sold in non-organised shops
sold for less than the minimum tax owed (R17.85), that is, the combined amount of the excise
tax and VAT. The report specified the names of DTCs and the cigarette brands (Chicago, RG,
Savannah, Pacific, Caesar, Sharp, Carvela) which they claimed were selling for below the
minimum tax owed and were thus indicative of illicit cigarettes (TISA, 2018b). Gold Leaf
Tobacco Company was named as accounting for 75.1% of sales below the minimum tax owed.
The Ipsos report raised questions, principally because of its failure to disclose publicly the
methodology. Ipsos responded that the proprietary nature of their information prevented
them from sharing further information on public domains. Selective public disclosure of
report findings and non-disclosure of the study’s methodology and raw data made it
impossible to evaluate and interrogate the study rigorously and raised questions regarding
the study’s intent and TISA/BATSA’s commercial agenda (Gonzalez, Malan & van Dyk, 2018,
Rowell, Evans-Reeves & Gilmore, 2014).
Various non-tobacco value-chain stakeholders, such as tobacco control/public health
advocates and journalists, have raised questions in the media and in interviews regarding the
secrecy surrounding the study’s methodology and the overall credibility of the report
(Gonzalez, Malan & van Dyk, 2018). One tobacco control/public health advocate stated that:
“Industry-funded research is a conflict of interest and the research cannot be credible. If a
study’s preliminary finding is not palatable to the client, then the client cuts out or manipulates
the study’s findings. Often information that reaches the public is used as a tool to restrict
tobacco control measures and excise tax increases. Anyone who is conducting industry-funded
research is compromised in their ability to conduct unbiased research. You cannot take money
from the industry and give them results that they will not be happy with.”
The report excluded any mention of MTCs in relation to the illicit tobacco trade; it did
however specify the contribution of MTCs to the South African economy in terms of
government tax revenue, job creation, and exports. This is an important distinction that the
51
report used to separate TISA members from DTCs (FITA and non-FITA members). TISA/BATSA
had previously reiterated this narrative on numerous occasions in the media, emphasising
that they represent the legal tobacco industry and by default, all DTCs are part of the illicit
tobacco industry. In taking this position, they absolve themselves of any industry complicity
in the illicit tobacco trade and persistently portray themselves as the industry’s good guys.
Taking the position of industry good guys is highly contentious. TISA/BATSA continue to deny
their engagement in unlawful business practices while persistently arguing that DTCs need to
be held accountable and that SARS is failing at doing its job in terms of eliminating the illicit
tobacco trade. According to BAT plc’s 2017 Annual Report, BATSA has a contingent liability of
R2.01 billion, covering both tax and interest, if they are found guilty by SARS of manipulating
their debt financing from 2006 to 2010.
Most non-MTC interviewees were of the opinion that BATSA, given their global history of
avoiding and on occasion evading tobacco taxes (Collin et al., 2004, Legresley et al., 2008,
Nakkash & Lee, 2008), is also engaging in the illicit tobacco trade, albeit at much more
sophisticated levels. Despite SARS investigations that pointed to BATSA’s participation in tax
avoidance strategies such as transfer pricing7 and tax-base erosion, TISA/BATSA have avoided
discussing the findings (van Loggerenberg, 2018, van Loggerenberg & Lackay, 2016).
The weakening of SARS’ investigative functions since 2014, the demise of the Large Business
Centre in 2015, and the failure of the criminal justice system to investigate SARS’s findings
further, resulted in a halt to investigation of MTCs’ tax avoidance for possible tax evasion
(Joffe, 2018). At present, and as indicated by one of the MTC interviewees, SARS is
investigating BATSA’s financial inconsistencies. According to a law enforcement interviewee,
“the South African tobacco industry has always played games regarding tax
evasion/avoidance, the multinational tobacco manufacturers have played more sophisticated
7 According to van Loggerenberg (2018), “transfer pricing refers to rules and methods for pricing transactionswithin and between enterprises under common ownership. Because of the potential for cross-border transactionsto distort taxable income, SARS can adjust intragroup transfer prices that differ from what would have beencharged by unrelated enterprises dealing at arm’s length.”
52
games.” According to one public health advocate interviewee: “We know that the
multinational tobacco companies have been involved in tobacco tax evasion across the
continent. There is no reason for us to believe that they are currently not involved in illicit
tobacco trade. This is a competition between tobacco companies and they are trying to pin
the blame on somebody else. They are basically trying to cut the competition.”
Despite the concerns raised about the Ipsos study, TISA used the study’s findings and
embarked on a comprehensive public advertising campaign. The campaigns were used to
trigger citizen lobbyist action against the illicit tobacco trade by citing the value of tax lost to
the fiscus and the threat to the job security of employees in the legal tobacco industry.
Citizens were provoked to lobby against tobacco-related government policies. TISA’s
campaigns used slogans such as #TakeBackTheTax, which were displayed on below- and
above-the-line advertising platforms. The #TakeBackTheTax campaign also included the
paying of social media influencers to promote the campaign’s narrative, making it accessible
to a wider audience (Gonzalez, Malan & van Dyk, 2018). The campaign also encouraged South
African citizens to sign an online petition “imploring” SARS and Parliament to take “urgent”
and “decisive” steps to combat the illicit tobacco trade.
The extensive use of media campaigns to reach wide audiences raises the question of whether
or not TISA/BATSA are using less-traditional forms of advertising and marketing to circumvent
the restrictions that were imposed on tobacco advertising in South Africa. Gilmore, AB &
McKee, M (2004) show how, in order to circumvent tobacco advertising restrictions in the
Soviet Union, BAT changed their marketing and advertising strategy and resorted to heavily
promoting their corporate image through sponsorships, donations and emergency relief
funds. This was done in order to portray a positive corporate image which was ultimately used
to market their cigarette brands. Ever since restrictions on advertising were first imposed by
the Tobacco Products Control Amendment Act, 1999, BATSA has embarked on a more
targeted approach to advertising. It has also invested heavily in research in order to optimise
their communication with the public (Sunday Times, 2010). This raises questions as to
whether industry-commissioned research is a new way for BATSA to overcome advertising
restrictions.
53
In response to the minimum tax owed being used an indicator of an illicit tobacco product,
two DTC interviewees indicated that a cigarette price set below the rate of the duty does not
imply non-payment of the duty, neither does a cigarette price above the duty imply payment
of the duty. Three DTC interviewees cited the loss-leader argument to explain why their
cigarette brands were being sold below the minimum tax owed. From a marketing
perspective, the loss-leader argument revolves around selling a product below the wholesale
price in order to entice customers into a store, where it is expected that the customer will
buy other, higher-priced goods. One DTC interviewee indicated that discounting cigarettes to
below the minimum tax owed was a form of marketing, since tobacco legislation limited
traditional forms of advertising. The vast majority of interviewees agreed with the argument
that cigarettes that are priced above the minimum tax owed do not necessarily pay duty. One
public health advocate indicated that TISA/BATSA’s persistent suggestion of using minimum
tax/price as an indicator of illicit tobacco products, is merely an example of the MTC’s efforts
to restrict excise tax increases.
Despite all the scepticism surrounding the credibility of the Ipsos report, one DTC interviewee
agreed with the study’s findings on under-declared production. The interviewee believed that
BATSA was struggling to win back lost market share on their Peter Stuyvesant brand and
therefore commissioned a study to discredit the DTCs that posed the biggest threat to the
Peter Stuyvesant brand. The interviewee also related how he himself began engaging in
under-declared cigarette production and how his brand played a role in taking market share
from Peter Stuyvesant.
After being raided by SARS in early 2000, the interviewee reconsidered the way in which his
business was distributing illicit cigarettes. He was prompted to clean up his financial records,
so as to appear to be more tax-compliant. He revised his distribution system to include
parallel distribution networks, one which distributes legal cigarettes through a team of sales
representatives to formal markets, and the other which distributes under-declared illicit
cigarettes to informal markets via third-party agents. Immigrants participating in informal
markets were cited as key participants in terms of illicit cigarettes reaching the end consumer.
Before the commencement of any given tax year, the manufacturer decides what amount of
tax he would like to pay to SARS. He thereafter uses that amount as a benchmark to guide his
54
business operations and ensures that all of his business’s legal financial transactions tally up
to that predetermined tax amount. This allows him to appease SARS auditors.
The interviewee emphasized that the very nature of the illicit tobacco trade involves the
manipulation of the cash side of one’s business and that all tobacco companies were engaging
in the illicit tobacco trade, albeit to varying degrees. He was, however, the only DTC
interviewee to make such a statement. He claimed that all DTCs were manipulating the cash
side of their businesses and adjusting their total sales relative to total production ratios. A law
enforcement interviewee agreed with this viewpoint. He emphasised that MTCs, and BATSA
in particular, cannot use this approach owing to the complexity of their financial systems and
were thus using more sophisticated methods to avoid or evade taxes.
55
5 Discussion
The narrative of the development of the South African tobacco market reveals tobacco
industry complicity as a factor in relation to the upward spikes in the illicit tobacco trade that
have been observed since 2015. The study reflects the shifting power dynamics within the
industry and the tactics used by both MTCs and DTCs in response to rising threats to their
interests. The results of the study indicate widespread avoidance of taxes by the industry,
with some participants being more brazen in their tactics than others. Historically, the MTCs
had the advantage of near-monopoly power but the entry of DTCs to the market diluted this
advantage.
In an effort to protect their interests, MTCs and DTCs put forth two uncorrelated narratives
which shared no common ground. DTC and FITA narratives have strong racial overtones,
focusing on white monopoly capital and transformation. DTCs strategically present their
business practices as part of the struggle towards the transformation of the sector. By using
the term transformation, they are claiming the moral high ground and portraying themselves
as rebels against white monopoly capital and who, altruistically, are leading the struggle for
economic balance and participation for all within the tobacco industry. However, this is simply
a facade to cover self-seeking and at times unscrupulous acts. Their pursuit of transformation
has very little to do with genuine economic development and benefitting all previously
disadvantaged groups, and instead is focused on shifting tobacco industry dominance away
from MTCs to specific DTCs.
DTCs are no longer the underdogs on the margins of tobacco trade; they do not fear the
power of the established tobacco industry and are taking on the MTCs using whatever means
they deem most expedient. The DTCs are carving their own place within the tobacco industry,
both legally and illegally. Legally they are improving on their business practices by increasing
production efficiency, establishing relationships with retailers, diversifying their portfolios
and expanding their networks into African markets. Illegally and unethically, they are also
allegedly engaging in cabal practices and bribing of government officials. The culmination of
these activities has been that power has shifted within the tobacco industry and, in response,
the MTCs have retaliated.
56
The strategic narratives of the MTCs are focused on condemning the criminal behaviour of
the DTCs. In order to protect their interests, MTCs are using industry-funded research and
media coverage to drive their narratives. They do this by intensifying public and government
attention away from their possibly unlawful business practices towards the alleged unlawful
business practices of DTCs. Like DTCs, MTCs are claiming the moral high ground by presenting
themselves as altruistic, the protectors of the working class, whose job security and welfare,
they claim, is threatened by DTC criminality. By doing so, they distract attention from their
own business practices.
MTCs are using self-funded research results to provoke citizen lobbyist action in an attempt
to influence tobacco-related government priorities and policies. TISA/BATSA’s most recent
#TakeBackTheTax campaign exploits structural and socio-economic constraints that South
Africa has struggled with for decades. TISA/BATSA are deliberately engaging in fear-
mongering by linking the study’s findings to negative consequences for job security and the
livelihoods of the working class. In a country where jobs are scarce and unemployment rates
are unacceptably high, TISA/BATSA are playing on citizens’ deepest vulnerabilities.
To protect their own interests, they are using the most vulnerable of society as pawns in their
fight against the strengthening of tobacco control measures. Nurturing civil protest has
important systemic consequences for the society at large and the fragile political economy.
BATSA is apparently not concerned with these potential ramifications. The tobacco industry
of South Africa provides a kaleidoscope of exploitation of the poor, self-preservation, greed,
market share wars, disinformation and propaganda campaigns, state infiltration, and
research aimed at protecting vested interests and driving strategic narratives.
In instances where studies are industry-funded, it should be required that the research
methodologies be made public and open to scrutiny, particularly by non-industry-funded peer
reviewers; peer reviewers should also be named. Cohorts of journalists have taken a stand
against industry-funded research, but the media as a whole must act responsibly when
publicising industry-funded research findings (Gonzalez, Malan & van Dyk, 2018). It is
imperative that the government remain both sceptical and cautious regarding information
57
provided by the industry. Research on the illicit tobacco trade needs to be conducted, without
industry interference and the findings need to be made more accessible to wider audiences.
It cannot be denied that the illicit tobacco trade poses a major impediment to the objectives
of tobacco-control and public health policies and places an increasing burden on the fiscus.
The South African government needs to expedite the tackling of the illicit tobacco trade and
at the same time strengthen tobacco-control legislation. They should first demonstrate their
commitment to tobacco control by ratifying the WHO FCTC’s Protocol to Eliminate Illicit Trade
in Tobacco Products, as the Protocol provides a template for how to tackle the illicit tobacco
trade.
Ratification of the Protocol, together with additional policies that attempt to curb industry
interference may reduce tobacco industry infiltration and influence on government decision-
making on tobacco control priorities and policies (Craig et al., 2019). Skafida et al. (2014)
showed how the tobacco industry has historically interacted with ‘government officials and
politicians’ to influence tax policy and protect their interests. It is therefore important that
the government adhere to Article 5.3 of the WHO FCTC in order to ensure the minimisation
of industry interference on tobacco-control policies and legislation. Clear signals need to be
given to all tobacco stakeholders that an industry that is part of a problem, cannot be part of
its solution when that solution runs counter to their interests. Should it be necessary to
engage with the tobacco industry, however, all engagement must be made transparent and
public. Close monitoring of the tobacco value-chain is crucial. The implementation of a track-
and trace-system and the use of secure supply-chain technologies such as hyper-ledger block
chains are important for tracking and tracing goods throughout the tobacco value-chain.
Again, removing human interference in this process should be mandatory.
Behind the multi-layered tobacco industry there is the further problem of an inefficient
government whose members often prioritise their own interests over the government’s
stated goals of socio-economic reform. For this reason, state institutions have become
vulnerable to industry interference. Government reform is also an important part of
addressing the illicit tobacco trade. State institutions need to rebuild capacity, which should
58
include multi-disciplinary teams committed to serving the country’s needs, accountability,
and freedom from further industry interference.
South Africa’s criminal justice system should adopt a zero-tolerance policy towards tobacco-
tax evasion in order to send a clear message to the industry. South Africa needs to take more
decisive steps to tackle illicit trade and strengthen tobacco legislation, to avoid undoing years
of tobacco-control measures that once made its tobacco-control policies globally respected.
To do this, the government needs to recognise the tobacco industry’s attempts to influence
government decisions in their favour.
59
6 Conclusion
Recent upward spikes in the illicit tobacco trade in South Africa are undermining tobacco-
control measures and have serious negatives consequences for public health outcomes.
Government inefficiency and a susceptibility to corruption have left the country vulnerable to
tobacco-industry infiltration. As a result, since 2015, declines in tax-paid cigarettes are the
result of upswings in illicit tobacco trade and the fiscus is being increasingly burdened. The
increase in under-declared cigarette production since 2015 reveals the tobacco industry’s
exploitation of weakened enforcement of the laws.
The study’s findings indicate that a positive relationship exists between the tobacco industry’s
actions and the upward spike in the illicit tobacco trade in South Africa from 2015. The study
also suggests that the South African tobacco industry is complicit in a range of exploitative
tactics aimed at circumventing tobacco-control policies. In an attempt to protect themselves
from competition and from government legislation, MTCs (TISA) and DTCs (FITA) use opposing
narratives to influence public opinion and government decision-making. Each group presents
itself as altruistic and disassociates itself from complicity in industry malpractice. Their
motives need to be made public to protect both citizens and government from manipulation.
State institutions must, therefore, be reconstituted to tackle the illicit tobacco trade
adequately, and the criminal justice system must hold offenders accountable for their actions.
The tobacco industry should not be participating in government decision-making on tobacco-
control measures. The scale of illicit tobacco activity in South Africa reinforces the need for
the country to adhere to the WHO FCTC and ratify the Protocol to Eliminate Illicit Trade in
Tobacco Products (World Health Organization, 2013).
60
7 References
Barber, S. & Ahsan, A. 2009. The tobacco excise system in Indonesia: hindering effective
tobacco control for health. J Public Health Policy. 30(2):208-225. 10.1057/jphp.2009.12DOI|.
Blecher, E. 2010. A mountain or a molehill: Is the illicit trade in cigarettes undermining tobacco
control policy in South Africa? Trends in Organized Crime. 10.1007/s12117-010-9092-yDOI|.
Blecher, E., Liber, A., Ross, H. & Birckmayer, J. 2015. Euromonitor data on the illicit trade in
Investigation into the recent spike in illicit tobacco trade in South Africa.
We are pleased to inform you that your ethics application amendment from the 27 August2018 has been approved. We are pleased to inform you that your ethics application has beenapproved.Unless otherwise specified this ethical clearance is valid for 1 year and may be renewed uponapplication.
Please be aware that you need to notify the Ethics Committee immediately should any aspectof your study regarding the engagement with participants as approved in this application,change. This may include aspects such as changes to the research design, questionnaires orchoice of participants.
The ongoing ethical conduct throughout the duration of the study remains the responsibility ofthe principal investigator.
We wish you well for your research.
Modie SempuAdministrative AssistantUniversity of Cape TownCommerce Faculty OfficeRoom 2.26 | Leslie Commerce Building